INDIAN SERVICE SECTOR

OVERVIEW AND IMPLICATIONS

PREPARED BY-
DEEPTI KAUR GABA
SHWETA KASHYAP
GURSIMRAN KAUR
UMANG ANAND
PALLAVI AGGARWAL
 SERVICE
 Service is Intangible

 It is an economic activity that does not result in

ownership

 Creates value for the customer

Providers of services constitutes the Tertiary

sector of Indian economy
OVERVIEW-INDIAN SERVICE SECTOR
 India stands out from other emerging economies
because its growth has been led by the service
sector.
 The Sector constitutes a large part of the Indian
economy both in terms of employment potential and
its contribution to national income
 The services sector contributes more than half of
the GDP in India, i.e., 55.8%(2007-08)and 60.7%
as per the recent data.
 The Service exports in India have grown up from
US $ 19.1 billion to US $ 73 billion in 2006.
 The sector covers a wide range of activities.
ACTIVITIES COMPRISING THE
SERVICE SECTOR
(a) Trade`
(b) Hotels and restaurants
(c) Transport including tourist assistance activities as well as activities
of travel agencies and tour operators
(d) Storage and communication
(e) Banking and insurance
(f) Real estate and ownership of dwellings
(g) Business services including accounting; software development;
data processing services; business and management consultancy;
architectural, engineering and other technical consultancy;
advertisement and other business services
(h) Public administration and defence
(i) Other services including education, medical and health, religious
and other community services, legal services, recreation and
entertainment services
(j) Personal services and activities of extra-territorial organizations
and bodies.
SERVICE-BEFORE AND AFTER
LIBERALISATION
 Before liberalization Services was the residual sector drawing
refugees from agriculture

 The share of services in GDP was 28.2% in 1950s and it rose

consistently over the period of the five decades and stood at 44.3%
in the 1990s.

 The service sector's share finally rose from 43.69 per cent in 1990-
91 to 51.16 per cent in 1998-99.

 Between 1996 and 2005- the triple impact of India’s external

liberalization, domestic economic reforms and the rise of a global
market for skilled services facilitated by information technology
makes itself felt, share of services in India’s GDP grew from just
over 40% to about 54%.
COMPARISON OF SERVICES AS A
SHARE OF GDP WITH OTHER
COUNTRIES S e r v ic e s a s s h a r e o f G D P in 2 0 0 5

80

70

60

50

40

30

20

10

0
U n it U n it M ex R us In d i B ra z C h in
ed S ed K ic o sia n a il a
ta te in g d Fed
s om e ra t
io n
REASONS FOR GROWTH OF SERVICE
SECTOR
 Both demand and supply factors have led to this growth.

 On the demand side, the high growth of services

output was mostly attributed to factors such as increasing
input usage of services by other sectors, mainly
manufacturing sector (i.e. higher domestic demand); higher
foreign demand due to trade liberalization; and high income
elasticity for services.

 On the supply side, the increased trade in services

following trade liberalization policies and other reforms in
the 1990s induced this growth.
IMPACT OF SERVICES SECTOR ON OTHER
MACROECONOMIC VARIABLES
Looking at the magnitude of services growth and its inter-linkages with other sectors
of the economy, it is important to understand the impact of services sector on
other macroeconomic variables.

The following issues have been studied:

(i) Whether the robust growth of the services sector has added a dimension
Stability to India's GDP growth.
(ii) Whether there has been a growing complementarity between services and
industrial sectors of the economy.
(iii) Whether the services sector also experienced 'jobless' growth like other
commodity-producing sectors.
(iv) Whether high growth of services sector had any inflationary impact on the
economy.
(v) Whether the imposition of services tax has boosted the Government’s
effort at mobilising more resources
 SECTORAL GROWTH PERFORMANCE OF
INDIAN ECONOMY
Before understanding this first point let us see, the sectoral growth performance of
Indian Economy. There have been considerable increases in the service sector
during last two decades, and looking in the trend of last five years the GDP have
increased to 8%.
Three major service sectors that have seen
remarkable growth are communication,
transportation and financial services.
Fact 1: DECLINE IN VOLATILITY OF OUTPUT
 So far as the fluctuation in GDP growth is concerned, there has been a
gradual reduction in volatility in recent years.
 The reduction in volatility of GDP growth rate has been contributed
significantly by the services sector as it recorded the least volatile growth as
compared to other commodity-producing sectors viz. agriculture and
industrial sectors.
This validates our hypothesis of the growing synergy between the
commodity producing sectors and the services sector.
 FACT2:MUTED CYCLICITY IN GDP

The size of output gaps have tended to become more moderate.

Looking at the supply side, services sector has been the growth driver in the
recent growth process, with more than sixty per cent share in Gross Domestic
Product.

This emerging growth dynamics of the Indian economy is expected to provide

necessary a cushion to any likely international oil price shock to the economy.
It being less cyclical in relation to other sectors, the cyclicity in GDP growth
is actually on the decline, with muted cycles operating now. Moreover,
services are less fuel-intensive compared to the industrial sector.
Fact 3: Consumption demand as the major growth driver

Looking at India's growth dynamics, it is found that the growth process remains
significantly domestic demand driven, engendered by consumption and investment,
although the share of exports is witnessing a gradual rise over the years.

Consumption accounts for more than 60 per cent of India’s GDP.

Since consumption is the least volatile component of demand, the volatility of this
growth process is greatly reduced by the presence of its dominance.
 CONSUMPTION DEMAND AS THE MAJOR GROWTH DRIVER
AND GROWING PREPONDERANCE OF SERVICES IN
CONSUMPTION
It is found that the growth process remains significantly domestic demand driven,
engendered by consumption and investment, although the share of exports is witnessing
a gradual rise over the years.
Consumption accounts for more than 60 per cent of India’s GDP. Since consumption is
the least volatile component of demand, the volatility of this growth process is greatly
reduced by the presence of its dominance.
GROWING COMPLEMENTARITY BETWEEN
INDUSTRIAL AND SERVICES SECTOR
GROWTH
 The principal objective here is assessing the contribution of
services to industrial growth.

 It is found that producer services with a lion share of 70.4 per

cent in 2004-05 dominates over various other services

 For the purpose of our analysis, we dis-aggregated the

services sector value added into producer, consumer and
government services since the eighties. It is found that producer
services with a lion share of 70.4 per cent in 2004-05 dominates
over various other services.

 It was found that the contribution of services to output growth

was a meager 0.06 per cent per annum during the eighties,
which increased substantially to 2.07 per cent per annum during
the nineties.
This validates our hypothesis of the growing synergy between the
commodity producing sectors and the services sector.
 Indian scenario-Services
and inflation

On the contrary, an examination of the NAS

(National accounts statistics) and price data
indicates that the contemporary growth process is
characterized by the co-existence of high services
growth with low and stable inflation ,thanks to the
credible monetary policy, which has kept the
inflationary expectations at bay.
Trends in Services, GDP and WPI – Growth
and Share (percent)

GDP Services Share of WPI index

growth growth services in GDP

1971-72 to 3.16 4.22 40.69 -

1980-81
1981-82 to1990- 5.64 6.44 44.38 -
91
1991-92 to 5.38 6.67 47.97 7.99
1995-96
1996-97 to 5.92 8.03 51.68 5.08
2000-01
2000-01 to 6.30 7.95 56.28 -
2004-05
 Conclusion drawn

The result clearly suggests that services sector share in GDP is not
positively associated with inflation in the Indian case. The rise in
services sector share in GDP along with effective monetary policy
have, in fact, had a moderating impact on inflation.

As seen in the table, in 1991-92 to1995-96 the service sector growth

was 6.67, it was 8.03 in 1996-97 to2000-01.the service sector has
shown a steady growth but WPI decreased during that period .
Factors that explain coexistence of high
service growth and low inflation

 In the recent years, inflationary impact of the services

through growth in PAD(public administration and defense
expenditure) appears to have been limited.

 Rising service invisibles have enabled a comfortable level of

current account deficit that facilitated a more orderly
movement of the exchange rate, in turn, moderating the
inflationary impact on the economy
IS SERVICE SECTOR GROWTH A“JOBLESS
GROWTH”??

 The concern that the acceleration in GDP growth in India in

the post-reform period has not been accompanied by a
commensurate expansion in employment has received a
focused attention from the policy makers.

 It is generally argued that the growth in services sector is a

‘jobless growth’.
EMPLOYMENT AND SERVICES SECTOR – NOT
SO 'JOBLESS'
 India’s share of employment growth in the tertiary has been higher
than in manufacturing sector on Usual Principal Status (UPS) basis.
In the decades of eighties and nineties, the fall in the share in
employment in agriculture sector has been increasingly absorbed by
the tertiary sector.

 However, in 2004-05 compared to 1999-2000, there is a change

with the fall in employment share of the agriculture sector being
absorbed both by the manufacturing and tertiary sectors with a
higher share for the former.
THE TABLE PROVES THE ABOVE FACT

While the recent rise in share in employment growth in manufacturing sector is

a positive development, the importance of services in employment creation
needs to be noted, particularly when India is competitive in many labor-
intensive and skill-intensive services and there is a huge market even now.
Total employment (both organized and unorganized sector) trends as
captured in the NSSO surveys are indicative of the fact that services
sector has recorded a relatively faster growth in employment
CURRENT SCENARIO

 Services sector in future providing about 70 per cent of the new job
opportunities in the economy

 Share of agriculture in total employment already falling, in the

coming years, the share of services would increase

 New employment possibilities in the services sector are construction, trade,

transport, storage, financial services, communication and personal services

 Employment in manufacturing would also expand, but its contribution to the

total increase in employment would only be around 17 per cent.

Thus, given the employment trends as emerging from diverse sources and the
employment potentials at the sectoral levels, it may be argued that a broad-
based high growth of GDP would lead to higher employment in the economy,
with services sector playing a lead role.
SERVICE TAX-A SOURCE OF REVENUE

 The number of services being taxed in India has increased

progressively from 3 in 1994-95 to about 92 in 2006-07 .
 The services tax was imposed at the rate of 5 percent,
this has now been increased to 12 per cent.
 There has also been a substantial growth in assesses base,
which increased from 3,493 in 1994-95 to 7, 74,988 in
2004-05.
 The collection of the services tax revenue has witnessed a
substantial expansion since 1994-95, rising from Rs. 407
crore in 1994-95 to Rs. 23,000 crore in 2005-06.
Services tax revenue as a
percentage of total tax
revenue
has also increased substantially
from 0.4 per cent in 1994-95 to 6.2
per cent in 2005-06 and is expected
to reach 7.8 per cent in 2006-07 .
The growth in services tax
collection has equally been
impressive. Growth in services tax
revenue has been facilitated both
by increase in rate of taxation as
well as increased number of
services being taxed.
In more recent years, after
recording a higher growth of 91.4
per cent in 2003-04, the growth in
services tax collection has come
down to 62 per cent in 2005-
06,which is also by and large,
impressive.
THE TABLE SHOWS THE ABOVE FACT
SERVICE SECTOR-COMPONENT OF INDIRECT
TAXES

 Further, services tax is emerging as an important component of indirect

taxes.
 The share of services tax in indirect taxes has increased more than
twenty-folds from a mere 0.6 per cent in 1994-95 to 13 per cent in
2005-06 .
 On the contrary, following the rationalization of duty structure, the
share of indirect taxes has decreased over the years. Thus, it appears
that falling share of custom duty has been amassed by the services
 Almost 60 per cent of the GDP is contributed by the services sector
alone. The growth in absolute quantum of GDP and higher proportion
of services sector therein holds promise for a larger revenue generation.
FUTURE POTENTIAL-THE INDISPENSABLE
SERVICE SECTOR
 The fact already floating in the air of "TERRITORY ECONOMIA"
that service sector has revivified the whole Indian economy by
injecting life serum into it, is ample enough to approve it as an
indispensable growth component of the Indian economy.

 The latest growth figures and its performance graph during last few
years reveal that it is headlong in progression to enlist itself with
the list of developed nations of the world.

 There has been a structural shift from the agriculture (primary)

sector to industrial (secondary) and service (tertiary) sector like any
other developed nation.
EFFECTS OF U.S. RECESSION ON INDIAN
SERVICE SECTOR

 Not much effect as Indian Service Sector’s boom attributed to the hike in
internal consumption and the per capita income of Indian lot.

 Certain sectors led by IT/ITES which make substantial amount of export to

US are incurring losses.

 However, impact of US led recession which clicked from the sub prime
crisis would be partial and somewhat of short span on our economy.

 Services like tourism, health care education, engineering, communication,

transportation, finance, IT, banking will continue it boom.
THANK YOU